Damages on Termination of Regulated Hire Purchase Agreements

We have recent experience of increasing challenges to claims for damages on early termination of regulated Hire Purchase Agreements for default on the basis of section 99(1) of the Consumer Credit Act 1974. Section 99 gives the debtor a right of voluntary termination, in which case the effect of section 100 is to limit the amount payable to such amount (if any) by which one-half of the total price exceeds the aggregate of the sums paid and the sums due in respect of the total price immediately before the termination.

So in effect the debtor’s contractual obligation after returning the goods is to make a payment bringing his or her total payments up to 50% of the total price.

Debtors’ advisors have increasingly been seeking to persuade courts that even in cases where a debtor has not exercised a right of voluntary termination, but accepts that a regulated Hire Purchase Agreement has been lawfully terminated by a Financier for default, the Financier’s damages should nevertheless be limited by the fact that the right of voluntary termination under section 99 previously existed.

Some district judges have been supplied with a summary of the decision of District Judge Eaton in Leicester County Court in July 2002 in the case of Rover v Siddons. In that case the point arose squarely for decision, and the district judge referred to the commentary in Goode, Consumer Credit Law and Practice on sections 99 and 100 and said that although it was common ground that the debtor had not exercised her right of voluntary termination “…this is a regulated agreement and my view is that s.100 must still be taken into account even where the finance company has terminated for breach as in this case. Substantial arrears are a repudiatory breach of the agreement and the absolute maximum which can be claimed is the sum calculated in accordance with s100(1) less payments. A minimum payment clause…is unenforceable as it imposes a greater penalty than that set out in s.100.”

In fairness to the district judge the commentary to sections 99 and 100 of the Act in Goode does not display the usual clarity which we have come to expect from the great work, and unfortunately fails to properly analyse an earlier case and ignores a later case altogether.

The earlier case is the decision of Woolf J in Wadham Stringer Finance Limited v Meaney [1981] 1WLR 39. Eagle eyed readers may realise that of course the vast majority of the provisions of the CCA 1974 were not brought into effect until May 1985, so this decision does indeed deal with the previous legislation, namely the Hire Purchase Act 1965. The relevant provisions are however very similar and the debtor argued head on that although she had not exercised her right of voluntary termination the Financier’s damages claim should be limited by the fact that she had previously had a right to do so.

The Judge rejected this argument:-

“Although I recognise that the [financier’s] interpretation can substantially restrict the protection given to a hirer…as the right to terminate has thereafter ceased to exist it cannot be cut down…I am conscious that…this could have an adverse effect…on…hirers under Hire-Purchase Agreements. By skilful drafting of agreements it could well be possible to deprive hirers…of the protection Parliament intended them to have”.

Nevertheless the judge ruled that the statutory provisions were clear and had to be followed by the court.

Before leaving the previous legislative regime it is important to note that the material provisions of the Hire-Purchase Act 1965 differ in one important respect from the scheme of sections 99 and 100 of the CCA 1974. This is because the limit on damages recoverable to the amount necessary to bring the total amount paid up to one half of the total price was expressly applied in section 29(2)(c) of the 1965 Act to “termination in any manner whatsoever”. This would have been fatal to the Financier’s argument in Wadham Stringer if not for a skilful piece of drafting which entitled it to rely on the right to call for an accelerated payment without terminating . The Agreement thus deliberately evaded the effects of the statutory restriction on damages recoverable in the event of termination.

However, there is nothing in sections 99 and 100 of the CCA which refers to “termination in any manner whatsoever” , so the obvious inference in accordance with the normal canons of statutory interpretation is that the legislature deliberately decided to restrict the debtor’s right to a cap on payments under section 100 to apply only where he or she had exercised a right of voluntary termination under section 99.

The case which is overlooked altogether in the commentary in Goode is First Response Finance Limited v Donnelly , a decision on 16 October 2006 in Durham County Court by District Judge Goudie. Again the point arose head on for decision: it was common ground that the debtor had not exercised her right to terminate under section 99, but nevertheless she argued that the maximum amount which could be recovered on termination by the Financier was capped by section 100.

The Wadham Stringer case was not cited to the court, but nevertheless the district judge was aware of the fact that the provision in the repealed section 29(2) of the 1965 Act referring to “termination in any manner whatsoever” had not been carried over into the CCA, which he rightly regarded as a significant point. He went on to say:-

“But sections 99 and 100(1) combined on the face of a clear reading of them do not extend the statutory cap to circumstances other than those in which the customer has exercised her section 99 right to terminate and which thereby gives rise to the operation of section 100(1). In addition to the clear wording of the Act itself which limits the application of the cap under section 100, the measure of damages for repudiation of a contract such as this…should be such sum as will put the Claimant in the position that it would have been in if the contract had been performed.”

The court therefore allowed the claimant to recover the balance of the hire purchase price less the credit given for the proceeds of sale:-

“Indeed recovering that sum would amount to a measure of damages putting them in the position that they would have been in had the contract been performed.”

The district judge expressly referred both to the earlier case of Rover v Siddons and to the commentary in Goode , but considered that they were both wrong.

Finally the district judge also rejected an argument based on the Unfair Terms in Consumer Contracts Regulations 1999 which had also found favour in Rover v Siddons . This was to the effect that the Financier’s liquidated damages clause “causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer” . The district judge disagreed because the Financier was simply enforcing its common law rights and the debtor’s right of early termination under sections 99 and 100 had of course been stated on the face of the Agreement at the outset.

It is also worth mentioning that some Financiers operate under the misapprehension that the debtor’s right of early termination only applies where 50% of the total price has been paid. This is not the case, and refusal to recognise this can itself amount to a repudiatory breach of the Agreement by the Financier. This may well be picked up by debtors’ advisers in these days of blogs and internet consumer chatrooms.

Of course this whole controversy may fall away if the FLA is successful in its attempts to persuade the Government to repeal sections 99 and 100 and the right of voluntary termination on the grounds that they are inconsistent with the UK’s obligations not to derogate from the pan-European scheme of the Consumer Credit Directive.